When credit unions replace payday lenders

By Felix Salmon

August 5, 2009

story headlined "Some credit union loans are not a good deal", which singled out some credit unions for predatory practices. But she got some useful feedback from credit unions and their customers, and on Tuesday Block's 720-word column appeared, under the headline "Some short-term credit union loan rates may be high", and taking a more measured stance.
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USA Today is doing something quite bloggish, it seems. On Monday, Sandra Block put up a 470-word story headlined “Some credit union loans are not a good deal”, which singled out some credit unions for predatory practices. But she got some useful feedback from credit unions and their customers, and on Tuesday Block’s 720-word column appeared, under the headline “Some short-term credit union loan rates may be high”, and taking a more measured stance.

Here’s an early graf on Monday:

In recent years, hundreds of credit unions have introduced short-term loans for members who face a temporary cash crunch. But some of the loans “are only marginally cheaper than traditional payday loans,” says Lauren Saunders, an attorney with the National Consumer Law Center.

And here it is again on Tuesday:

Ideally, a credit union loan should offer a low-cost alternative to a payday loan, and many do. But before you sign up, scrutinize the details. Some credit union loans “are only marginally cheaper than traditional payday loans,” says Lauren Saunders, an attorney with the National Consumer Law Center. Other credit unions have lent their names to third parties that are offering payday loans, the NCLC says.

There are two things I like here. Firstly is the fact that Block is now making it clear that many credit unions really do offer a low-cost alternative to payday loans. And secondly is the fact that she was happy to revisit and republish her story with more detail and nuance, instead of taking a defensive I-stand-by-my-story approach.

There’s one thing I don’t like, however, which is that Block doesn’t give a good example of what a payday-loan alternative should look at. She’s good at the horror stories, of course, but in the interests of balance she should have featured a much more consumer-friendly product as well.

Nevada Federal Credit Union says it offers a 0% annual percentage rate. Brad Beal, president of the credit union, says it charges an application fee of $70 for a 14-day loan of up to $700, or $60 for members with direct deposit. That’s half the fee charged by the average payday lender, he says. But the National Consumer Law Center points out that a $70 application fee for a $400, 14-day loan is the equivalent of a 455% APR.

The 0% APR is a bait-and-switch teaser, and is pretty evil. And what is the implicit interest rate on a 14-day $400 loan which costs the borrower a total of $470? The APR calculation formula does indeed come up with 456%, but that has no embedded compounding: it essentially assumes that you might refinance $400 every 14 days, but that you pay the $70 in cash. I look at this loan, instead, as carrying a 17.5% nominal interest rate over a 14-day period. Since there are 26 14-day periods in a year, the annualized interest rate you’re paying is 1.175^26, or 6,622%.

In any case, let me redress the balance here a little and share the terms of the payday-loan alternative that my own credit union, LES People’s, offers.

The minimum loan is $100; the maximum is the lower of $500, or 50% of net monthly pay.

The duration of the loan is four pay cycles. Most people get paid twice a month, so that means two months; Social Security checks, however, are paid monthly, so for people on Social Security it’s four months.

The interest rate is 10% per year.

There is an up-front fee as well: 10% of the total amount of the loan, up to a maximum amount of $25. We refund $10 of the fee if the borrower participates in some form of financial counseling after taking the loan.

There are no late fees.

In order to assure repayment, we generally ask that the borrower has their paycheck directly deposited into their account, although we can make exceptions.

No more than two of these loans per year: if you want anything more than that, you need to get a proper personal loan.

Nevada FCU’s president, Brad Beal, told Block that he wasn’t taking advantage of his members with his $70 fee, and that such loans indeed were “economical” for his members. I don’t know the specifics of his credit unions finances, but I don’t believe him. We at LES People’s don’t make a lot of money from our emergency loans, as we call them, but these loans do provide a useful service for our members, and help prevent them from going instead to predatory payday lenders. Since we’re owned by our members and operate in the service of our members, that’s exactly what we should be doing. I don’t have numbers to hand, but I hope and trust that most credit unions are more like us than they are like Nevada FCU.